CON laws have long been used to prevent “ruinous competition”

Recently, I’ve been going through the available research on Certificate-of-Need (CON) laws and their effects. CON laws are most often associated with attempting to restrict the supply of health care in order to control costs by reducing the amount of duplicate and unused services. In order to be able to legally provide a healthcare service in states with CON laws governing certain services, you would have to demonstrate a “need” for this service to the state and have them approve any new facility or expansion of an existing one.

I found a fascinating article about the history of CON laws by Timothy Sandefur of the Pacific Legal Foundation. Much to my surprise, CON laws like this have been around since the 1800’s:

CON laws were originally devised to regulate railroads and other public utilities. They first appeared in Massachusetts in the 1880s and were soon taken up in other states, where they were often applied to streetcar lines.

As William K. Jones explains in his 1979 Columbia Law Review history of CON laws, Progressive Era proponents offered five main justifications for these restrictions: they would:

  • prevent “wasteful duplication” of services,
  • prevent “ruinous competition,”
  • ensure that regulated entities would continue to serve out-of-the-way customers,
  • promote private investments in public service industries, and
  • forestall certain kinds of externalities.

The second point above is particularly ironic. According to the article, CON laws were also imposed on bridges, gas and electric companies, telephone and telegraph services, water works, and other industries. Given the progression of American wealth and innovation that was created through competition, it’s amazing to read about how CON laws were justified during this time:

CON rules were also expected to counteract the economic inefficiencies that government regulations themselves caused. Railroads were often legally barred from charging market rates for travel or refusing unprofitable carriage. This created an incentive for rivals to engage in “cream-skimming” — i.e., maximizing profits by serving only large population centers and bypassing unprofitable routes or out-of-the-way customers. By preventing more efficient competition, CON laws would help railroads turn a profit despite being burdened with regulatory costs….

….Finally, some Progressives promoted CON requirements out of a belief that the “chaotic” free market should be replaced by “rational” planning, undertaken by expert agencies. The Progressives envisioned disinterested bureaucrats, insulated from democratic pressures, precisely organizing the provision of goods and services to consumers. A New York court expressed skepticism about this idea in a 1908 case, when a railroad appealed the denial of permission to expand: “It is not possible either for the State Commission or the Interstate Commission to ascertain and enforce a reasonable rate either for passengers or freight in the way that can be ascertained by the establishment of competition,” wrote the judge. But this was a rare exception. Despite their reputation, most “Lochner era” courts upheld these restrictions, allowing legislatures to regulate business as they saw fit.

Government regulators have been trying to intervene by picking winners and losers instead of letting the market decide for a long time. CON laws for health care services are still in place in thirty-eight states, including North Carolina. They have been proven to reduce access to health care, raise the cost, and in some cases lower the quality of care. You can learn more about the effect CON laws have on industry competition and patient care here, here, and here.

Jordan Roberts / Health Policy Analyst

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. He analyzes state and national health policy issues with an eye toward removing governm...

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